In this section, we provide brief updates on regulatory developments in auditing and accounting that may impact Japanese companies in the United States. Further discussion of the issues can be found in KPMG's Department of Professional Practice's Defining Issues.
Please contact Hideo Takada (404-222-3316；firstname.lastname@example.org) or Shin Kusanagi (404-222-7611；email@example.com) in the Atlanta office, or Michael Maekawa (213-955-8331; firstname.lastname@example.org) in the Los Angeles office, with questions.
On November 3, 2010, the FASB proposed ASU, Reconsideration of Effective Control for Repurchase Agreements, which, if adopted, would change the way that companies that are accounting for repurchase (repo) agreements and other similar agreements need to assess a transferor’s ability to exercise effective control. The assessment of effective control would be focused on the transferor’s contractual rights and obligations by removing the criterion to assess a transferor’s ability to exercise those rights or honor those obligations. This change likely would result in most repo agreements being accounted for as secured borrowings instead of as sales.
In the meeting of the FASB’s Emerging Issues Task Force held on November 19, 2010, the Task Force reached final Consensuses about presentation and disclosures related to revenue and bad debt expense for health care entities, Step 1 of the goodwill impairment test, accounting for certain fees charged to pharmaceutical entities associated with recently enacted health care legislation, and disclosing pro forma information for business combinations. The Task Force reached a proposed Consensus about the accounting for certain fees charged to health insurers associated with recently enacted health care legislation. The Task Force also discussed the accounting for the deconsolidation of a subsidiary that is considered in-substance real estate and accounting for legal costs associated with medical malpractice and similar claims.
On November 15-16, 2010, the Financial Executives International (FEI) hosted a financial reporting conference. Converging global accounting standards including recent developments on FASB and IASB projects dominated the FEI’s conference that updated attendees about accounting and SEC developments. Panelists from the SEC, FASB, IASB, accounting firms, user groups, and industry presented and responded to questions from an audience that included financial-statement preparers (issuers), users, and auditors.
Issues In-Depth 10-5 contains KPMG’s observations about the proposed FASB ASU, Leases, and highlights some of the more significant implications and potential conceptual and application issues. This publication is intended to facilitate discussion, commentary, and analysis of the proposal, which the FASB issued as part of its joint project with the IASB, and the potential effect on companies that are applying U.S. GAAP.
The Boards believe that both U.S. GAAP and IFRS can be improved by developing one global set of standards about lease accounting. If the Exposure Draft is finalized as proposed, it would significantly change how lessees and lessors account for and report leasing arrangements in their financial statements. Lessees would be required to recognize in their statements of financial position an asset that represents the right to use the leased property over the estimated lease term and a liability to make estimated future lease payments for each lease under the proposed right-of-use model, which would fundamentally change the accounting and reporting of leases currently classified as operating leases. Lessors would account for leases under two very different accounting models: the performance obligation approach, which would apply if the lessor retains significant risks and benefits associated with the leased property, or the derecognition approach, which would apply to all other leases. The timing of profit recognition by lessors would be accelerated under the derecognition approach as compared with the performance obligation approach. The proposed guidance would significantly affect disclosure requirements for both lessees and lessors.
The Exposure Draft does not specify an effective date. The Boards issued a separate discussion paper that seeks input about effective dates and transition methods for several joint projects under their Memorandum of Understanding.
On November 29, the FASB and IASB issued Progress Report on Commitment to Convergence of Accounting Standards and a Single Set of High Quality Global Accounting Standards, in which the Boards reaffirmed June 2011 as the target completion dates for their joint projects about financial instruments, revenue recognition, leases, the presentation of other comprehensive income, and fair value measurement.
The progress report also details the Boards’ decisions to defer until after June 2011 substantive deliberations about four projects—the broader financial statement presentation project, financial instruments with characteristics of equity, emissions trading schemes, and the reporting entity phase of the conceptual framework. The FASB and IASB also deferred deliberations about several of their independent standards-setting projects (e.g., contingency disclosures for the FASB and IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and annual improvements for the IASB).
KPMG recently published New on the Horizon: Leases for Retailers, which considers the proposed requirements in the IASB Exposure Draft, Leases, and the proposed FASB ASU, Leases, and emphasizes the potential effect on retailers. The publication compares the proposed ASU and U.S. GAAP, and highlights that the new proposals would significantly affect retailers who operate large numbers of stores across the globe, many of which are leased and recorded as operating leases. The proposed ASU would require these operating leases to be recorded on the balance sheet, thereby causing an increase in recognized assets and liabilities and a front-loading of expenses compared with operating lease accounting today.
The proposed ASU also would have an effect on the accounting for the optimization of a retailer’s store network, which includes the opening and closing of stores, restructuring, and modernization measures. Retailers also would be affected by the changes to lessor accounting in their role as intermediate lessor in sublease arrangements, with the implementation of either the performance obligation approach or the derecognition approach causing a dramatic effect on a retailer’s balance sheet.
The publication also highlights the major differences between the IASB Exposure Draft and the proposed FASB ASU.
Issues In-Depth 10-6 provides a comprehensive account of the topics discussed at the annual AICPA National Conference on SEC and PCAOB Developments on December 6-8, 2010. Representatives of the SEC, PCAOB, FASB, IASB, and AICPA discussed restoring investor trust, convergence of U.S. GAAP and IFRS, audit quality, and the effect of the Dodd-Frank Wall Street Reform and Consumer Protection Act on the accounting profession. Other areas of focus included accounting and auditing standard-setter priorities and reporting observations identified during reviews of registrants’ filings.
The FASB and IASB likely will focus on some of the significant comments about the joint FASB-IASB Exposure Draft on revenue recognitionduring redeliberations. The ED was issued in June, and the Boards received nearly 1,000 comment letters from preparers, users, auditors, regulators, and industry groups. They also heard from constituents during public roundtable meetings held globally. The Boards recently established a plan to address the comments on the proposal with a goal of completing redeliberations on the major issues by June 2011.
While constituents generally supported the Boards’ efforts to develop a single, comprehensive revenue-recognition model, they expressed concerns about how the ED’s concepts would be applied. Many constituents were concerned about the transfer of control concept, particularly how the indicators of control would apply to service contracts and contracts for the continuous transfer of work-in-progress assets. They also were concerned about how to identify distinct goods or services that would be accounted for separately. Constituents cited concerns about the proposed guidance about segmentation of contracts, contract modifications, product warranties, variable consideration, collectibility, time value of money, onerous performance obligations, required disclosures, and retrospective application.